Today was an RBD for VWO unless perhaps it went ex-Dividend like EEM did today. Same for DGS, but surprisingly not for EWX.

Is anybody else enjoying the market run-up today especially in VWO?

Immensely, and in VEA to boot. I am actually a little overweight these two, according to my spreadsheet, as I have put a lot of my new IRA and taxable contributions towards them this year. I don't think I'm going to re-balance downward after this RGD, I'm not too out of whack. Enjoy the weekend, phriends.

Lbill wrote:Part of the problem is that I've waited too long to pull the trigger in the past and the *%$! market turns around and skips away. I remember starting to buy in 2009 when the S&P hit 666, thinking I'd edge in as it went lower. But it never did go lower and I never "edged in". That was my theory this time again, and the thing did a 180 and blasted back up - deju vu all over again. But maybe this time that was a fakeout and it will keep going down. Next stop for me is right about 900 on the S&P. I think Jeremy Grantham said it's worth about that at the present time.

This is why we don't market time.

We may indeed see 900 on the S&P500 again.

But we may not.

So far the market has gained 25% since this thread was started. While you waited for it to hit 900. That's a ton of money left behind.

Don't try to guess the future. Stay the course, and rebalance, reacting to the PAST, instead of acting on guesses about the future.

rrosenkoetter wrote:Don't try to guess the future. Stay the course, and rebalance, reacting to the PAST, instead of acting on guesses about the future.

Rebalancing is guessing about the future -- guessing that the securities you sold will go lower and the ones you bought will go higher. And the guess is based on the revert-to-the-mean theory that after securities have risen in price they are more likely to fall and after they have fallen, they are more likely to rise. Just because you have a formula to tell you what your guess will be, it doesn't mean you're not guessing. The blackjack player has his system, you have your system, and you can argue about which works better.

rrosenkoetter wrote:Don't try to guess the future. Stay the course, and rebalance, reacting to the PAST, instead of acting on guesses about the future.

Rebalancing is guessing about the future -- guessing that the securities you sold will go lower and the ones you bought will go higher. And the guess is based on the revert-to-the-mean theory that after securities have risen in price they are more likely to fall and after they have fallen, they are more likely to rise. Just because you have a formula to tell you what your guess will be, it doesn't mean you're not guessing. The blackjack player has his system, you have your system, and you can argue about which works better.

"Guessing" is an interesting verb, gerund, whatever.
But I'm not sure it's the right word-choice regarding AA definition and rebalancing.
We're implementing an "algorithm" to control risk and deal with things like psychology and loss-aversion.
Whatever we call it, it's good to be rich...

GregLee wrote:Rebalancing is guessing about the future -- guessing that the securities you sold will go lower and the ones you bought will go higher. And the guess is based on the revert-to-the-mean theory that after securities have risen in price they are more likely to fall and after they have fallen, they are more likely to rise. Just because you have a formula to tell you what your guess will be, it doesn't mean you're not guessing. The blackjack player has his system, you have your system, and you can argue about which works better.

Hi Greg:

Sorry, but it appears that you do not understand "rebalancing." Rebalancing has nothing to do with "guessing" which securities will go go lower or higher. "Rebalancing" is the process of returning underperforming or overperforming assets to their original target allocations. No guessing involved.

Analysts will instantly explain (after the fact) that investors feel Friday's optimism about a Euro solution was overstated, and that they are being cautious heading into the mid-week 4th of July market closing.

You read it here first.

Keith

Last edited by umfundi on Fri Jun 29, 2012 7:43 pm, edited 1 time in total.

I always think of rebalancing as a way to control my risk profile, as opposed to potentially increasing my returns. It has nothing to do with mean reversion of the asset class, although that is a nice benefit if it occurs after I've re-balanced.

Analysts will instantly explain (after the fact) that investors feel Friday's optimism about a Euro solution was overstated, and that they are being cautious heading into the mid-week 4th of July market closing.

You read it here first.

Keith

Plus they're still down about 5-6% from 3 months ago. But we're in this for the long haul, amiright?

The Wizard wrote:
We're implementing an "algorithm" to control risk and deal with things like psychology and loss-aversion.

I see a fly crawling up the middle of my computer screen, and I make the rule that if the fly crawls to the left, I'll buy bonds today, otherwise I'll buy stocks. That's an algorithm, the fly controls my risk, it can't be affected by my mood or my aversion to loss. Of course, I'm not gambling, because I've got an algorithm to decide my wagers for me -- it's not me who's deciding. Is that like what you mean?

phish_indexer wrote:I always think of rebalancing as a way to control my risk profile, as opposed to potentially increasing my returns. It has nothing to do with mean reversion of the asset class, although that is a nice benefit if it occurs after I've re-balanced.

Rebalancing follows naturally from the idea that you have an Asset Allocation, and that you are diversified into investments that are not well correlated.

Rebalancing does increase your return, by one or two tenths of a percent a year (My own calculations on the three-fund portfolio.*)

Criteria to time rebalancing (other than automatically) are, well, timing, and are gilding the pig. You may believe in momentum, or reversion to the mean, to create a rebalancing strategy that kicks in sooner, or perhaps later. It does not matter.

Of course, there are studies that show rebalancing reduces returns. If you do not rebalance, your portfolio will become tilted towards the higher returning investments, increasing your risk. No news there.

Best wishes,

Keith

* I calculated a constant monthly dollar amount invested in a reasonable mix of the three-fund portfolio over the last decade. Invest 40% US, 20% International, and 40% Bonds. If you invest to maintain your portfolio at those percentages (rather than just invest at those percentages) your return is enhanced by a couple of tenths of a percent per year.

I imagine that fine-tuning your rebalancing strategy beyond that is worth a few hundredths of a percent per year.

The Wizard wrote:
We're implementing an "algorithm" to control risk and deal with things like psychology and loss-aversion.

I see a fly crawling up the middle of my computer screen, and I make the rule that if the fly crawls to the left, I'll buy bonds today, otherwise I'll buy stocks. That's an algorithm, the fly controls my risk, it can't be affected by my mood or my aversion to loss. Of course, I'm not gambling, because I've got an algorithm to decide my wagers for me -- it's not me who's deciding. Is that like what you mean?

I guess some might believe there is a "rebalancing bonus". But the primary function of rebalancing is to maintain a constant risk profile of stocks to bonds.
Imagine if all the assets are in an IRA account, and put in a Target Retirement Fund that suits their risk profile, then the rebalancing is done by the fund itself daily. But many people have assets in non IRA accounts where holding TR funds is not tax-efficient and might need to rebalance manually. Rebalancing daily to your risk profile would be ideal, but not possible. This is where having a written IPS or algorithm of 'when' to rebalance and 'how' to rebalance helps. So we set bands and time limits on rebalancing.

The only problem is Entropy, leading to the eventual heat death of the universe. [Seen on /.]

LazyNihilist wrote:But the primary function of rebalancing is to maintain a constant risk profile of stocks to bonds.

Yes, I understand that that is why you do it. That's what is going on in your head when you rebalance -- your intent is to manage your risk. But we might also be interested in the objective facts about your portfolio and the market. It's not all about your personal psychology.

Overall, I am quite puzzled by this psychological tendency in modern investing. To my mind, if you sell bonds and use the money to buy stocks, e.g., you are betting that either bonds will fall or stocks will rise, and it doesn't matter how you came to that decision. Maybe your AA-rebalancing algorithm told you to do that, or you used my fly-on-the-screen method, or your dead great grandfather spoke to you emphatically in a dream. A bet is a bet. People who think they are not gambling or speculating in the market because they have a system that tells them how to bet are just fooling themselves.

GregLee wrote:To my mind, if you sell bonds and use the money to buy stocks, e.g., you are betting that either bonds will fall or stocks will rise, and it doesn't matter how you came to that decision. Maybe your AA-rebalancing algorithm told you to do that, or you used my fly-on-the-screen method, or your dead great grandfather spoke to you emphatically in a dream. A bet is a bet. People who think they are not gambling or speculating in the market because they have a system that tells them how to bet are just fooling themselves.

No, it's not a bet... When I sell bonds to buy stocks, I am NOT betting that either bonds will fall or stocks will rise. Be reacting to the past, I am making no bet about the future. I am just selling my winners (selling high) and buying my losers (buying low).

The only bet I make is that I assume stocks and bonds will both rise over the long-term. But every time I rebalance, I'm making no short-term bets.

GregLee wrote:Yes, I understand that that is why you do it. That's what is going on in your head when you rebalance -- your intent is to manage your risk. But we might also be interested in the objective facts about your portfolio and the market. It's not all about your personal psychology.

Overall, I am quite puzzled by this psychological tendency in modern investing. To my mind, if you sell bonds and use the money to buy stocks, e.g., you are betting that either bonds will fall or stocks will rise, and it doesn't matter how you came to that decision. Maybe your AA-rebalancing algorithm told you to do that, or you used my fly-on-the-screen method, or your dead great grandfather spoke to you emphatically in a dream. A bet is a bet. People who think they are not gambling or speculating in the market because they have a system that tells them how to bet are just fooling themselves.

The key objective fact about a portfolio is the overall asset allocation of the whole portfolio. As a somewhat extreme illustration, consider the following:

Imagine an investor named Alice, who originally put 99% of her money in stocks and 1% of her money in bonds. Then one day she sells a little bit of her stocks and buys bonds with the proceeds, and after doing so she has 98% of her money in stocks, and 2% of her money in bonds. Would it be fair to say that Alice is betting bonds will rise or stocks will fall because she sold stocks to buy bonds?

Now imagine another investor named Bob, who currently has the same amount of savings as Alice, but who started with 99% of his money in bonds and 1% of his money in stocks. Then on the very same day, he sells a little bit of his bonds and buys stocks with proceeds, and after doing so he now has 98% in bonds and 2% in stocks. Does this mean that Bob is betting stocks will rise or bonds will fall?

I would say that, if anything, it is Alice who is betting on stocks and Bob who is betting on bonds, since Alice has 49 times as much of her portfolio in stocks as Bob does. I'll also note that most of us are "betting" on stocks to the some extent, in that we consider that stocks probably have a higher expected return then bonds (though without much agreement on how much higher). If we didn't think so we'd have little if any stock investments since stocks are almost universally considered riskier than bonds (though without much agreement on how much riskier).

The rebalancer is merely moving the overall asset allocation (which is the key objective fact) back to what it originally was. Thus rebalancing is not making a bet, except to the extent that the original allocation was a bet, in which case the rebalancer is just sticking to the original bet.

Intent really only matters when you want to figure out if not rebalancing constitutes market timing. If you refrain from rebalancing because it's too much work to do so, because of transaction costs involved, or to avoid taxes, that isn't market timing since strategy doesn't involve a prediction about what the market will do at this time. However, if you avoid rebalancing because you think that the asset that recently went up has momentum behind it, that is market timing because it does involve such a prediction.

Analysts will instantly explain (after the fact) that investors feel Friday's optimism about a Euro solution was overstated, and that they are being cautious heading into the mid-week 4th of July market closing.

Analysts will instantly explain (after the fact) that investors feel Friday's optimism about a Euro solution was overstated, and that they are being cautious heading into the mid-week 4th of July market closing.

You read it here first.

Keith

I will not be buying your newsletter, good sir.

There is a better newsletter?
I suppose I'll have to stick with my day job.

Or, let me say, that on Wednesday November 7, the market will be up or down because projections are the lame duck congress will / will not do something about renewing the Bush tax cuts or sequestration, automatic cuts to curtail spending.

GregLee wrote:To my mind, if you sell bonds and use the money to buy stocks, e.g., you are betting that either bonds will fall or stocks will rise, and it doesn't matter how you came to that decision. Maybe your AA-rebalancing algorithm told you to do that, or you used my fly-on-the-screen method, or your dead great grandfather spoke to you emphatically in a dream. A bet is a bet. People who think they are not gambling or speculating in the market because they have a system that tells them how to bet are just fooling themselves.

GregLee wrote:To my mind, if you sell bonds and use the money to buy stocks, e.g., you are betting that either bonds will fall or stocks will rise, and it doesn't matter how you came to that decision. Maybe your AA-rebalancing algorithm told you to do that, or you used my fly-on-the-screen method, or your dead great grandfather spoke to you emphatically in a dream. A bet is a bet. People who think they are not gambling or speculating in the market because they have a system that tells them how to bet are just fooling themselves.

Could not disagree more strongly with this sentiment.

Or maybe rebalancing is just a way of maintaining a constant asset allocation?

Some people do bet and market time or whatever you want to call it on an almost daily basis. This more like gambling like.

LazyNihilist wrote:But the primary function of rebalancing is to maintain a constant risk profile of stocks to bonds.

Yes, I understand that that is why you do it. That's what is going on in your head when you rebalance -- your intent is to manage your risk. But we might also be interested in the objective facts about your portfolio and the market. It's not all about your personal psychology.

Overall, I am quite puzzled by this psychological tendency in modern investing. To my mind, if you sell bonds and use the money to buy stocks, e.g., you are betting that either bonds will fall or stocks will rise, and it doesn't matter how you came to that decision. Maybe your AA-rebalancing algorithm told you to do that, or you used my fly-on-the-screen method, or your dead great grandfather spoke to you emphatically in a dream. A bet is a bet. People who think they are not gambling or speculating in the market because they have a system that tells them how to bet are just fooling themselves.

1. We project that Stocks and Bonds have risk - of varying degrees and types - and expect compensation for the risk without guarantees.
2. Otherwise, without expected compensation, NO ONE (yourself included) would invest in Stocks and Bonds.
3. Based on personal circumstances, we set boundaries to control the risk we knowingly take.

By investing in Stocks and Bonds, and/or in setting risk boundaries, investors attempt to make responsible decisions. Conversely, the use of buzz-words like "gambling, speculating, betting" implies irresponsible behavior, almost as IF promoting animosity.

Time to bump this, guess what, its down again. Not the best week in town.

I feel like a genius today, I been working on a IRA tranfer that got messed up, the funds got sold on the July 3rd, funds showed up today in my other account and by sure luck I'm picking up a percent or two. Out of the 6-7 past transfers I think this is the first time I hit it in the right direction.

So get set guys, I going to buy back in today, that means the next day it should drop a good 2-3%

VTSAX (Total Stock Market Index Admiral) is up 26.7% since August, 8th 2011... the day this thread was started... one year ago.

26.7% in one year.

Yet this entire year, we've had a ton of gloom posts, people planning on 0% real going forward, and people not wanting to get into the stock market right now because "times are bad".

If 26.7% is just an abstract number to you, my 500k in stocks made me $133,000 these last 12 months Enough to pay off my mortgage, which I did. That is some serious money with a real beneficial impact on my family's life.

I sure am glad I didn't panic a year ago when I heard "U.S. stocks in freefall". Thanks Bogleheads

Last edited by HomerJ on Tue Aug 07, 2012 10:10 am, edited 1 time in total.

HomerJ wrote:VTSAX (Total Stock Market Index Admiral) is up 26.7% since August, 8th 2011... the day this thread was started... one year ago.

26.7% in one year.

Yet this entire year, we've had a ton of gloom posts, people planning on 0% real going forward, and people not wanting to get into the stock market right now because "times are bad".

If 26.7% is just an abstract number to you, my 500k in stocks made me $133,000 these last 12 months Enough to pay off my mortgage, which I did. That is some serious money with a real beneficial impact on my family's life.

I sure am glad I didn't panic a year ago when I heard "U.S. stocks in freefall". Thanks Bogleheads

And to give a more global perspective, the Vanguard Total World Index (VT) is up about 15.6% over the same period. So, foreign stock ownership hurt returns, but a 15+% return for stocks in any one-year period is great nevertheless (IMO).

- DDB

"We have to encourage a return to traditional moral values. Most importantly, we have to promote general social concern, and less materialism in young people." - PB

Regardless, most folks did not buy into the total stock market in huge amounts on August 8th.
The bulk of their equity $$$ was there in July, 2011 as well.
So we're making out OK at this point, but the 26% gain number is just one of those volatility oddities.
It does help validate the principle of throwing additional funds into stocks on RBDs, obviously...

Last edited by The Wizard on Tue Aug 07, 2012 12:56 pm, edited 1 time in total.

The Wizard wrote:Regardless, most folks did not buy into the total stock market in huge amounts on August 8th.
The bulk of their equity $$$ was there in July, 2011 as well.
So we're making out OK at this point, but the 26% gain number is just one of those volatility oddities.
It does help validate the principle of throwing additional funds into stocks on RBDs, obviously...

Yep, you're right... I may have made $133,000 since August 8th last year, but I'm not including the $70,000 I probably lost in the months before that.

I retract my snarky post. Still, it has been a fairly good 12 months for the stock market even with all gloom and doom around here.